Widening gap between private and public payments for hospital care

The Growing Difference Between Public And Private Payment Rates For Inpatient Hospital Care

By Thomas M. Selden, Zeynal Karaca, Patricia Keenan, Chapin White, and Richard Kronick
Health Affairs, December 2015

Medicare’s payment rate in 2012 for the average inpatient stay in that year was, in inflation-adjusted dollars, similar to what Medicare would have paid in 1996 for the average stay in that year.

During the period 1996–2001, differences in predicted standardized payment rates were relatively small across primary payers, and payment rate differences remained relatively constant. Since 2001, however, payment rates for stays covered by private health insurance have diverged sharply from payment rates for those covered by Medicare and Medicaid.

The predicted percentage difference between the rates of private insurers and those of Medicare has increased substantially over time. In 1996 private insurers paid 106.1 percent of Medicare payment rates, a payment rate difference of 6.1 percent. This payment difference rose to 64.1 percent in 2011 and 75.3 percent in 2012. Medicaid payment rates averaged approximately 90 percent of Medicare payment rates throughout the study period, with differences in most years that were not significantly different from zero.

Our findings can offer insights into policy prescriptions, including the recent recommendation to cap private insurance payments at 125 percent of Medicare rates. Our findings suggest that such a cap would affect far more than just the most egregious cases.

Our findings also highlight the following important questions for further research. To what extent, if at all, is the private-public differential due to cost shifting from public to private payers, given the growing body of evidence that challenges the existence of such cost shifting? Or to what extent is the differential due to hospitals’ exploiting market concentration or engaging in a technological “arms race,” in which they invest heavily in expensive diagnostic and surgical equipment? To what extent have the declines in private inpatient hospital stays between 2008 and 2012 (from 13.6 million stays to 11.2 million) contributed to the widening differential? More important, what are the impacts of the growing differential on consumers? Has the differential had any effect on access to or quality of care for public patients, or on private patients’ financial burdens?


How Much Do Hospitals Cost Shift? A Review of the Evidence

By Austin B Frakt
The Milbank Quarterly, March 2011

From the Discussion

Cost shifting is just one of many possible responses to shortfalls in public payments to hospitals (another is cost cutting). Moreover, private payment-to-cost margins change for many reasons other than cost shifting (another is changes in the balance between hospitals’ and health plans’ market power). Indeed, the theoretical literature on the subject shows that cost shifting can take place only if hospitals both possess market power and have not fully exploited it. This limits both the conditions under which cost shifting is possible and its extent. Once market power is fully exploited, as it would be by a profit-maximizing firm, there is no more room for cost shifting. The theoretical literature also reveals the potential endogeneity of public prices in models of private ones, the role of costs and that of hospitals’ and plans’ market power.

Given these findings, what can be said about the likelihood of cost shifting in the future? Relative to the period in which cost shifting is most likely to have occurred at a relatively high rate (when indemnity plans were the norm, from 1987 to 1992), plans now are better able to resist price increases due to network-based contracting. Conversely, relative to the period in which there was likely no cost shifting (when tightly managed care dominated in the mid-1990s), price competition is now weaker because consumers are less accepting of networks with the same level of restrictions as existed then. To the extent that hospitals still have some unexploited market power, perhaps some cost shifting is possible, but given the results of papers I reviewed, it is likely to be at a rate closer to twenty cents on the dollar than the dollar-for-dollar rate suggested by industry-funded reports.

The exploitation of market power is the privilege of private industry, subject to antitrust regulation, from which our market-based health system is not immune. Plans’ and hospitals’ market power may shift again with the new health reform law. The PPACA calls for pilot programs of the accountable care organization (ACO) payment model, which will compensate integrated groups of providers on a capitated basis for all the care for a population (Gold 2010). This will encourage providers to integrate, possibly increasing their market power (Frakt 2010b; Reinhardt 2010). If plans’ market power holds constant or is weakened, it is likely that private prices will increase, even without changes in public payments.



By Don McCanne, M.D.

Medicare has long been credited with being a more efficient purchaser of health care than has the private insurance industry. Evidence of that has been lower payments made by Medicare compared to the higher payments made by private insurers.

Private insurers have claimed that lower Medicare payments have shifted costs to the private insurers. But Austin Frakt and others have shown us that it is primarily the market power of the hospitals and provider groups that have driven up private insurer payments, while Medicare payments have held steady independently of what private insurers are paying.

The report from the Agency for Healthcare Research and Quality (AHRQ), published in the current issue of Health Affairs, confirms that Medicare payments, adjusted for inflation, have held steady for the last two decades, whereas private insurance payments have continued upwards at an increasing rate, such that, as of 2012, private insurers pay 75 percent more than Medicare.

Medicaid, another public payer, has maintained payment rates at about 90 percent of Medicare’s, also at a steady rate adjusted for inflation.

Where should the balance be? Our public payers have been able to hold rate increases at the level of inflation, and that benefits the taxpayers. Our private insurers have been able to infuse more money into the health care delivery system, and that benefits the providers of health care. But private insurers pay higher rates at the cost of higher premiums, benefit reductions, and greater patient cost sharing. The private insurers have been much less effective in moderating the high rate of health care inflation, and that harms patients financially.

We should be concerned about the movement on multiple fronts to further privatize public health insurance programs. Medicaid is being shifted to private managed care programs. Enrollment in private Medicare Advantage plans continues to expand. Efforts to convert Medicare into a premium support program (vouchers to purchase private plans) are intensifying. Of course, private plans place a very costly administrative burden on our health care system. Do we really went to do this when the private insurers have already proven to us that they cannot adequately control health care prices?

Health care providers do not think that they are being paid too much by the private insurers. But when they see how much less the public insurers - Medicare and Medicaid - are paying them, they are likely to join the chorus of demanding that our public insurers be replaced with private plans.

Under further privatization of our health care financing, it will be the patients who are stuck with the public (tax) and private (premiums and cost sharing) bills. The pain would be much less with a well designed single payer national health program.